A softening jobs market gave the Fed a reason to reduce rates
Updated September 17, 2025, 4:10PM ET
After months of holding steady even in the face of intense political pressure from the Trump administration, a weakening jobs market was finally the fuel needed to drive the Federal Reserve to cut.
The central bank announced a 25-basis-point cut to the federal funds rate on Wednesday, the first rate movement by the Fed since December 18, 2024. The cut in December was the third of three straight rate cuts to end 2024, which some experts believe could repeat itself in 2025.
The federal funds rate, which does not move in a one-to-one ratio with mortgage rates, is now a range between 4% and 4.25%.
In the announcement, it stated that 11 of the 12 members of the Federal Open Market Committee (FOMC) voted in favor of the 25-bps cut. Only newly-appointed Stephen Miran voted against the action, as the release stated he was in favor of a 50-bps cut.
Based on the dot plot released alongside the rate cut announcement, nine participants believed another 50 basis points of cuts would be appropriate by the end of 2025. On one extreme, one participant believed rates should go back up by 25 basis points by the end of the year, and at the other extreme, another thought an additional 125 basis point drop was appropriate.
Melissa Cohn, regional vice president of William Raveis Mortgage, said that the potential impact of tariffs will likely reduce the number of cuts the Fed will make through the end of 2026. She cited Jerome Powell calling Wednesday's action a "risk management cut" as a sign that the central bank might not be preparing for aggressive slashing of rates.
"I think that we're not done with cuts, but I think that the expectation that there will be multiple cuts this year and multiple cuts next year is off the table," Cohn told Mortgage Professional America. "I think that they're still very much concerned about the inflationary impact of these tariffs, and that we really have not yet begun to see the real impact, as many companies have sort of been absorbing the cost of the tariffs.
"What Powell did say is he thought by the end of 2027 that the Fed funds rate would be down to 3.31%, which is almost a full point lower than where we are today. That's good news, but that can change in a month. We've seen the data change. We've seen the Fed's perspective change."
While the rate cut was expected, it became a certainty after recent jobs reports showed significantly fewer jobs created than originally reported. While the Fed is still concerned about inflation, which remains more elevated than its 2% goal, tending to a softening jobs market became a bigger priority.
Mike Fratantoni, senior vice president and chief economist of Mortgage Bankers Association (MBA), said the cut shows that while there are concerns about employment numbers, it isn't time to push the panic button.
"The projections show that the median FOMC member anticipates two additional cuts in 2025 and one more in 2026, with the expectation that the job market will remain soft while inflation, while rising, won’t move too far before returning to the Fed’s 2% target," Fratantoni said. "While the decision was not unanimous, with one dissent from the newest governor, Stephen Miran, the strong vote for the 25-basis-point cut suggests that members, while acknowledging that downside risks to the job market have increased, are not panicking about the state of the economy."
Wednesday’s rate announcement ends a tumultuous month for the central bank. Miran was confirmed just this week to fill an open seat on the FOMC. There is also the ongoing battle to remove governor Lisa Cook for alleged mortgage fraud, a case that is likely heading to the Supreme Court.
Powell's thoughts
Fed chair Jerome Powell spoke to the media following Wednesday's rate cut announcement. He said it's a challenging time with the central bank's dual mandate pulling in opposite directions.
"You know it is such an unusual situation," Powell said. "Ordinarily, when the labor market is weak, inflation is low, and when the labor market is really strong, that's when you have to be careful about inflation. So we have a situation where we have two-sided risk, and that means there's no risk-free path. And so it's quite a difficult situation for policymakers."
When you have both mandates pulling in different directions, it comes down to weighing which is the more imminent challenge to monetary policy. Prior to job data revisions, the Fed believed that inflation was the bigger challenge, which forced them to hold rates.
With the updated information that the jobs market is much softer than originally thought, Powell said the Fed has to change course, but such a move doesn't come without a wide range of opinions about the correct path.
"It's also partly about what's the right thing to do in light of the tension between the two goals, how do you weigh them?" Powell said. "How worried are you about one versus the other? I think it would actually be surprising if you didn't have a pretty wide range of views based on this kind of highly unusual situation. But we get together, we discuss, we have a great discussion, and then we decide what to do, and we act. There is a wide dispersion of views, and I think that's understandable and natural in the current situation."
Powell also noted that despite Miran's desire to cut by 50 basis points, there "wasn't widespread support" for a 50-bps cut at the current meeting.
"We've kept our policy at a restrictive level, and we were able to do that over the course of this year because the labor market was in very solid condition with strong job creation," Powell said. "I think if you go back to April and now look at the revised job creation numbers for May, June, July and August. I can no longer say that. The risks that were clearly tilted toward inflation, I would say they're moving toward equality, and that suggests that we should be moving in the direction of neutral, and that's what we did today."
Cut priced in?
Bill Banfield, chief business officer at Rocket Mortgage, said the rate cut is a sign that the central bank is concerned about the current state of the job market.
"The Fed’s 25-basis-point cut today reflects their recognition that employment is weakening and inflation remains above the Fed’s goal of 2%," Banfield said. "This move helps bring monetary policy back toward neutral, supporting growth without overheating the economy. "
Fed set to decide between a 25- or 50-basis-point cut this week. Sam Williamson of First American sees a 25-bps Fed funds rate cut as most likely, despite markets eyeing a potential half-point move.https://t.co/ClLrDPxL32
— Mortgage Professional America Magazine (@MPAMagazineUS) September 16, 2025
One theory that economists have floated in recent weeks is that the rate cut was so expected that markets had already priced in the decline. Banfield said that while that might keep rates flat in the near term, borrowers should be able to continue to benefit from the recent rate declines.
"Mortgage rates may stay relatively flat in the short term since markets had already priced in this cut," Banfield said. "However, consumers could benefit from lower short-term rates, making adjustable-rate mortgages – which closely follow the Fed’s moves – more attractive. For consumers, it’s another signal that the cost of borrowing is gradually moving lower."
Trick or treat
The Federal Reserve will announce its next rate decision on October 29, two days before Halloween. The question over the next month is whether mortgage brokers will find another rate cut in their Halloween basket, or a lump of coal in the form of another rate hold.
As the rate was announced on Wednesday, CME FedWatch projected an 80.3% chance of another cut in October, with a 19.7% chance that the rate would remain the same. It also gave a 4.7% chance of a 50-bps cut and a 75.7% chance of a 25-bps cut.
After the announcement, the chance of an October rate cut jumped to 94.1%, with a December cut at 94.2% likely.
Sam Williamson, chief economist at First American, told Mortgage Professional America that the central bank will have to walk a fine line between helping the economy with cuts and moving too quickly, which could cause inflation.
“The Fed is navigating a delicate balance,” Williamson said. “Move too quickly on rate cuts and risk reigniting inflation, or delay and risk further labor market deterioration. Policymakers weigh these competing risks through the lens of their dual mandate—price stability and maximum employment.
“Until recently, a strong labor market allowed the Fed to keep policy restrictive, despite a modest rise in unemployment. Now, with job growth slowing and unemployment trending higher, the trade-off is shifting. Still, with inflation above target, any easing is likely to be gradual and framed as risk management, rather than a policy pivot.”
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